Due to the worldwide outbreak of COVID-19, businesses across industry sectors are likely to go through an extended, though finite, period of reduced revenues and continuing fixed costs. Most businesses are likely to suffer large costs/losses. See More : https://www2.deloitte.com/in/en.html

1. Let’s just say it never
happened: Considerations for
faster economic recovery –
what banks, companies and
regulators can do

2. Let’s just say it never happened: Considerations for faster economic recovery – what banks, companies and regulators can do
2
Businesses across industry sectors are likely to go through an extended, though finite, period of reduced revenues and
continuing fixed costs. While some businesses may seem resilient, and some may even do better. Most businesses are
likely to suffer large costs/losses.
These are essentially “COVID Crisis Investments” being made by businesses along with the government in the fight
against the pandemic.
A complete halt in all business operations has already led to a strain on the cash position and working capital. Businesses
are likely to require additional liquidity support to restart once the situation normalises and operations reach optimal
levels. The liquidity crunch may also shift downstream to the vendors in their supply-chain, the customers, and their
related ecosystems.
The industry is apprehensive of the following sequence of events, as a result of impaired operations during the period of
lockdown and resultant abnormal losses:
• Breach of lending covenants—financial ratios and business metrics—agreed in lending covenants
• Downgrade of ratings, potentially triggering accelerated redemptions on instruments not under the RBI moratorium
• Increase in cost of incremental debt from existing lenders due to lower ratings, as well as liquidity challenges as lenders
may be averse to lending below certain thresholds.
Businesses which otherwise are sustainable in the long term, may also choke and default. The government, RBI, and
banks need to collectively take measures to ensure that businesses do not collapse en masse and in turn, push banks into
a systemic lockdown/failure.
Let’s just say it never happened: Considerations
for faster economic recovery – what banks,
companies and regulators can do

3. Let’s just say it never happened: Considerations for faster economic recovery – what banks, companies and regulators can do
3
Proposed solution
Negative impact on profitability and liquidity metrics due to the losses incurred during the primary impact period of
COVID-19 needs to be segregated to identify businesses that continue to remain viable with some support. A simple
and systematic two-step approach to isolate the impact of COVID on businesses, with suggestions to provide necessary
liquidity support by banks to businesses that remain sustainable post COVID, with or without restructuring of existing
liabilities, is proposed.
The banking sector could step in to provide the desired and a focussed relief in the form of Crisis Liquidity Bridge
through additional Working Capital Term Loan (WCTL), Funded Interest Term Loan (FITL), and other relevant facilities that
businesses may require to overcome the COVID impact.
The proposed solution avoids a direct budgetary support by the government to businesses and the potential waste of
additional liquidity due to a lack of rigor in determining rightful recipients.
Two-step approach
As the first step, the balance sheets of businesses need to be repaired by moving the impact on account of
COVID from P&L to the balance sheet.
• The excess of costs (including non-cash and finance costs) over revenue during the COVID impact period
may be quantified on a quarterly basis, and capitalised as a COVID Crisis Investment in the balance sheet.
It may be then amortised over a period of say, five years, and treated as special deferred expenditure as
part of long-term sources until fully amortised. The amortised amount would continue to be treated as
tax deductible expenses so that the tax shield, on loss incurred due to COVID, continues to be available
with businesses for utilisation over a period.
• Businesses that project forward as sustainable, after adjustment on account of moving impact of COVID
Crisis Investment to the balance sheet and assumed disbursal of additional liquidity up to similar amount
“Crisis Liquidity Bridge”, with or without some restructuring of their existing liabilities, would qualify as
sustainable or potentially sustainable businesses.
• The banks may continue to classify accounts per prevailing guidelines, and follow RBI’s policies for
Income Recognition and Asset Classification.
In the second step, additional liquidity support (Crisis Liquidity Bridge) of up to the amount of the COVID
Crisis Investment is to be provided by banks to businesses meeting the aforementioned sustainability test.
Banks may consider corrective actions for businesses that do not qualify as sustainable post COVID.

4. Let’s just say it never happened: Considerations for faster economic recovery – what banks, companies and regulators can do
4
Months 1 1 1 1 3 3
Period 1 Mar-20 1 Apr-20 1 May-20 1 Jun-20 3 Q1 FY2021 3 Q1 FY2021
Revenue 500 - 100 300 400 400
Variable costs 325 - 70 210 280 280
Employee costs 45 45 45 45 135 120
Other expenses 65 52 55 59 166
EBITDA 65 -97 -70 -14 -181 -
Depreciation 12 12 12 12 36 -
Interest 15 15 15 15 45 -
PBT 38 -124 -97 -41 -262 -
Tax 8 - -
PAT 30 -124 -97 -41 -262 -
Liabilities 31 Mar-20 30 Jun-20 30 Jun-20
Equity Capital 150 150 150
Reserves And
Surplus
725 463 725
Shareholder
Funds
875 613 875
Bank borrowings 600 600 600
Other long term
liabilities
75 75 75
Total Liabilities 1,550 1,288 1,550
Assets 31 Mar-20 30 Jun-20 30 Jun-20
Net Fixed Assets 1000 964 1000
COVID Crisis
Investment
262
Other net current
assets
250 250 214
Cash and bank
balances
300 74 74
Net current
assets incl cash
550 324 288
Total Assets 1,550 1,288 1,550
Manufacturing business: Illustrative example
Profit & Loss Statement
Pre-COVID
Pre-COVID
Post BS repair
Post BS repair
Post COVID
Post COVID
Companies may be allowed an option to adopt the above accounting treatments of capitalising the COVID Crisis
Investment in the balance sheet, or continue with it being expensed out in the profit & loss statement.
Balance Sheet
Networth is
maintained
Asset size is
maintained
COVID Crisis
Investment is
capitalised
Excess costs over revenue of 262 are capitalized as
Covid Crisis Investment in balance sheet

5. Let’s just say it never happened: Considerations for faster economic recovery – what banks, companies and regulators can do
5
Implementing the two-step approach
At the end of the second month of each quarter, the government to announce whether COVID Crisis
Investment will be permissible for the current quarter
Investment from each quarter to be provisionally reviewed and provided for in the business’
balance sheet
Statutory auditor of businesses to confirm provisional COVID Crisis Investment for each quarter
starting 1 April 2020 and within seven working days of the quarter ending
The entire evaluation-to-disbursement process is to be completed in a time bound manner [15 to 20 days].
The Processing Bank could then, with the assistance of suitable external experts, if required, carry
out an internal rating exercise after adjusting for the COVID Crisis Investment and assumed disbursal
of the Crisis Liquidity Bridge. If the organisation’s revised rating is not two notches lower that the
organisation’s last rating and more than RP4, then the companies can be objectively categorised as
the following:
• Category A: If no additional support is required to establish their sustainability
• Category B: If with additional support, in the form of restructuring of their existing liabilities,
sustainability of companies can be established
• Category C: Businesses that after COVID are unsustainable or where the promoter’s integrity/
capability is considered doubtful would fall under this category.
The Processing Bank and other Indian banks, NBFCs, and institutions shall disburse the Crisis Liquidity
Bridge amount within three working days from its approval by the Processing Bank. As the proposed
borrowing by banks from RBI, as well as the subsequent lending by banks of Crisis Liquidity Bridge
to businesses is guaranteed by the government, banks should consider extending this funding to
businesses at 100 basis points above their cost of borrowing from RBI as above
The Processing Bank shall form a committee, which shall be the single window for clearance of such
Crisis Liquidity Bridge for companies in category A and B, and review of the credit for the bridge. If
approved, the amount of the Crisis Liquidity Bridge shall be disbursed on a pro-rata basis by Indian
banks, NBFCs, and financial institutions to their current lending as a share of the total lending by
Indian banks, NBFCs, and institutions to the organisation, unless the Processing Bank decides to
disburse the entire amount itself.
Thereafter, the business shall apply for funding, on a quarterly basis, if required, to the lead bank of
the consortium or the largest lender to the business (the Processing Bank), as the case may be.
Those businesses that have a surplus on account of the revenues over costs in a particular quarter
would be deemed to have zero COVID Crisis Investment for that particular quarter
Banks shall review performance and cash flow position of borrowers on an annual basis:
• If earlier repayment is possible, then business shall be required to repay the Crisis Liquidity Bridge
funding earlier. The amortisation of the COVID Crisis Investment and quantum of tax deductible
benefit may be linked to repayment of the Crisis Liquidity Bridge.
• If borrowers require additional repayment time, or additional funding support to remain
sustainable, then banks may assess providing such support on a case-by-case basis.

6. Let’s just say it never happened: Considerations for faster economic recovery – what banks, companies and regulators can do
6
Support required from the RBI and
the government
The proposed solution requires limited support, primarily from the RBI and government in the form of the following:
• An amendment to the accounting standards or release of a new accounting treatment by the Ministry of Corporate
Affairs (MCA) or the Institute of Chartered Accountants of India (ICAI), in connection with the existing accounting
standards and suitable clarification to provisions of the Companies Act, 2013 to allow capitalisation of the COVID Crisis
Investment and its subsequent amortisation over a period of five years
• This adjustment should also be applicable for listed bonds that the SEBI governs. The SEBI should also recognise and
allow the amortisation. The RBI and SEBI can also consider making this adjustment applicable for rating agencies during
their evaluations.
• Government to guarantee bonds issued by banks to raise funds for providing the Crisis Liquidity Bridge
• Government to provide guarantee to lending banks for the Crisis Liquidity Bridge provided by them to each qualifying
organisation for the bank’s benefit against any loss/default
• The RBI to amend the Prudential Framework for the Resolution of Stressed Assets dated 7 June 2019; its
recommendations to be considered in conjunction with the impact of the potential Crisis Liquidity Bridge

7. Let’s just say it never happened: Considerations for faster economic recovery – what banks, companies and regulators can do
7
The Crisis Liquidity Bridge support requirement by the industry is estimated to be INR 3– 4 lakh crore assuming that the
impact of COVID will continue on businesses for two quarters.
The proposed solution avoids direct budgetary support from the government to businesses and potential waste of
additional liquidity due to lack of rigor in determining the rightful recipients.
• Default on the Crisis Liquidity
Bridge repayment by businesses
assumed to be 5–10 percent
• Government may have to
provide INR 30,000–40,000
crore support to banks for
their benefit against default by
businesses in repayment of the
Crisis Liquidity Bridge over a
period of five years
• Speedy recovery of economy and preservation of employment
• Mitigation of significant potential exposure of banks towards
NPA of >INR 3 lakh crore (at 10 percent default on bank credit
to industry), and subsequent government support towards
capitalisation of banks to address their capital erosion due to
loss of interest and additional provisioning
• Faster growth of GST and Income Tax collections for
government: Assuming monthly GST collections have declined
by 50 percent to INR 50,000 crore per month post COVID,
and with proposed liquidity support through banks, the GST
collections revive at an accelerated rate, then the government
would be able to collect more during the five-year period
• Assuming a 1 percent spread over banks’ borrowing and other
costs, banks’ annual earnings will improve by INR 3– 4 thousand
crore and provide a cushion to absorb potential default by
businesses
Estimates of cost to
government
Likely benefits to
government

8. Let’s just say it never happened: Considerations for faster economic recovery – what banks, companies and regulators can do
8
Responsible Party Action Impact
RBI Suspend ratings for three quarters. Downgrade of rating on account of COVID will,
• Increase the cost of incremental debt from existing
lenders
• Lead to a liquidity challenge as new banks/lenders
would be averse to lending to businesses with rating
below certain thresholds
• Potentially trigger accelerated redemptions on
instruments that are not under the RBI moratorium
MCA (or ICAI) Amend the accounting standards or release a new
accounting treatment to allow for capitalisation of
the COVID Crisis Investment and their subsequent
amortisation over a period of five years, and their
treatment as special deferred expenditure as part
of long-term sources until they are fully amortised.
• The impact on account of COVID Crisis Investment
is being moved from P&L account to the balance
sheet. While it would have earlier reduced reserves
and surplus, it would appear as the COVID Crisis
Investment in lieu of cash/liquidity erosion on the
asset side post amendment
• This may gradually help bring the financial ratios and
business metrics back to normal
RBI Issue requisite guidelines for banks to consider the
following:
• Evaluate businesses’ profitability/feasibility after
making requisite adjustments on account of the
COVID Crisis Investment
• Categorise businesses in-line with a
predetermined criterion, to avoid any scrutiny
in the future, and proceed with resolution
applicable to category of business
It will facilitate efficient implementation by banks and
objective categorisation of businesses
SEBI Make applicable the adjustment for COVID Crisis
Investment for listed bonds that the SEBI governs,
and for consideration by rating agencies during
their evaluations.
Companies Get COVID Crisis Investment reviewed by statutory
auditors on a quarterly basis and apply for the
Crisis Liquidity Bridge funding to lead/largest
lender.
This helps quantify the COVID Crisis Investment by
companies.
Banks • Categorise businesses based on feasibility of
businesses post COVID, after adjustment on
account of moving the impact of COVID Crisis
Investment to balance sheet and assumed
disbursal of additional liquidity up to a similar
amount, with or without some restructuring of
their existing liabilities.
• Revised rating for sustainable and potentially
sustainable businesses should not be
substantially lower than last rating, and should
be more than RP4.
• The processing bank to form a single-window
committee to review and approve Crisis Liquidity
Bridge funding.
• Upon approval, the amount of the Crisis Liquidity
Bridge shall be disbursed by Indian banks,
NBFCs, and financial institutions in proportion to
their debt exposure within three working days of
approval, unless the processing bank decides to
disburse the entire amount itself.
• Categorisation of businesses is done in an objective
manner
• Relief is targeted towards rightful recipients
Timely support is provided
Indicative sequence of actions:

9. Let’s just say it never happened: Considerations for faster economic recovery – what banks, companies and regulators can do
9
Responsible Party Action Impact
Government Announce, at the end of the second month of each
quarter, whether the COVID Crisis Investment will
be permissible for the current quarter.
As the impact of COVID may continue on business for
an extended time, the government may accordingly
extend the duration for this support.
Banks Undertake annual reviews of companies to assess
if a) earlier repayment of Crisis Liquidity Bridge
is possible, or b) if additional repayment time
is required to be given, or additional funding is
required for business sustenance.
Based on the individual performance of businesses,
the Crisis Liquidity Bridge repayment period can be
reconsidered to enable businesses to sustain, as well
as utilise it only for targeted purposes.
RBI • Amend the Prudential Framework for the
Resolution of Stressed Assets dated 7 June
2019 and require its recommendations to be
considered in conjunction with the impact of the
potential Crisis Liquidity Bridge.
• Come up with a new framework for assets
affected by the crisis and permit resolutions.
This enables restructuring of existing liabilities of
potential sustainable companies post COVID.
RBI Provide interim liquidity to banks through reduced
CRR for a longer duration.
This will help banks access funds to provide additional
funding to qualifying companies.
Government Issue certificates of dues payable by the
government (such as tax refunds), with specific
provisions made for recognising such a
certification as due security.
Instead of immediate cash outflow to support
businesses in the form of refunds of tax and other
dues, by issuing certificates of dues that can be
mortgaged to raise funds, the government is able to
preserve its own liquidity for now.
RBI Allow issuing bonds by banks to the RBI/public
at large to raise funds equivalent to the Crisis
Liquidity Bridge provided to various qualifying
companies by banks.
This helps banks raise funds to return the additional
liquidity used during the CRR relaxation.
Government Provide guarantee to bonds issued by banks to
raise funds for the Crisis Liquidity Bridge
It helps reduce cost of capital for banks, and enables
them to lend at lower costs to businesses.
Government Provide guarantee to lending banks for the
Crisis Liquidity Bridge provided by them to each
qualifying business.
• It collateralises the loan extended and helps
eliminate the need for any additional security
creation by businesses for the express disbursement
of the Crisis Liquidity Bridge.
• This secures the bank against any loss/default by
businesses on account of the Crisis Liquidity Bridge
• It reduces the direct budgetary support by
government to potential default by businesses
against the Crisis Liquidity Bridge only, and is further
deferred over several years, hence preventing
immediate pressure on the fiscal deficit.

10. Let’s just say it never happened: Considerations for faster economic recovery – what banks, companies and regulators can do
10
Responsible Party Action Impact
Government Provide industry-/sector-specific concessions,
which may include an additional corpus of funds to
be routed through the SIDBI or sector-focussed FIs
(e.g., PFC, REC, and IREDA) for equity contribution
for restructuring proposals with suitable
backstopping arrangements.
This enables restructuring of potentially sustainable
businesses post COVID.
RBI Direct rating agencies to adjust for COVID Crisis
Investment and Crisis Liquidity Bridge to monitor
current and assess future ratings.
This helps in isolating the impact of COVID on
businesses.
RBI Allow special treatment of bonds in banks’ balance
sheets issued for Crisis Liquidity Bridge, extended
through a special account created in every bank.
RBI Facilitate the structuring of banks and segregation
of accounts into “good bank” and “bad bank.”
This enables banks to focus on their core business of
lending.

11. Let’s just say it never happened: Considerations for faster economic recovery – what banks, companies and regulators can do
11
Contacts
Uday Bhansali
President
Financial Advisory
Deloitte Touche Tohmatsu India LLP
udaybhansali@deloitte.com
Jyoti Vij
Deputy Secretary General
Federation of Indian Chambers of
Commerce and Industry
Jyoti.vij@ficci.com
Deloitte
FICCI
Rajesh R Agarwal
Partner
Financial Advisory
Deloitte Touche Tohmatsu India LLP
rragarwal@deloitte.com
Abha Seth
Consultant
Federation of Indian Chambers of
Commerce and Industry
abha.seth@ficci.com
Sumit Khanna
Partner, Leader
Corporate Finance and Restructuring Services
Financial Advisory, Deloitte Touche Tohmatsu India LLP
sumitkhanna@deloitte.com
Anshuman Khanna
Assistant Secretary General
Federation of Indian Chambers of Commerce and
Industry
anshuman.khanna@ficci.com
Kaustubh Mittal
Director
Financial Advisory
Deloitte Touche Tohmatsu India LLP
kmittal@deloitte.com

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